In a glass mountain-top palace that looms over Tbilisi like something from a Bond movie, Bidzina Ivanishvili talks fondly of his penguins. It's not true, he says, that he keeps them in a special refrigerator. "I have a breed capable of standing normal temperatures," he explains. He also owns several lemurs, a herd of deer and a pet zebra – not to mention a stunning collection of modern art, all financed with a fortune made in Russia.

The billionaire is leading the country's once-divided opposition into the most important election since the rose revolution swept the old order from power almost a decade ago. For the first time, Mikheil Saakashvili – the hero of that hour – faces a real challenge to his authority in parliamentary elections on Monday that could change the course of this corner of the Caucasus.

The poll is bitterly contested. This small mountain nation (population: 4.5 million) on the doorstep of Russia is more polarised than at any time since 1991 and independence from the Soviet Union. At stake is whether Georgia moves towards genuine democracy, or whether the rose revolution that swept Saakashvili to power in 2003 fizzles out.

The country is also at the heart of a strategic battle between Moscow and the west. Russia insists Georgia is part of its backyard. To prove a point, it invaded in 2008 after Saakashvili unwisely tried to grab back rebel South Ossetia. Washington and the EU say Georgia is a sovereign nation that can decide its own destiny. Two geopolitical visions, Atlanticist and neo-Soviet, collide in a landscape of ancient villages, medieval towers and breathtaking mountains.

Until recently, Saakashvili and his ruling United National Movement party had been expected to cruise to victory. All this changed after the release by two opposition TV stations 12 days ago of a horrific video showing prison officers abusing inmates and sodomising them with broom handles. "When I watched it I thought it was a nightmare. The images were just awful," said Khatuna Kipiani, an opposition supporter.

The video revealed something rotten at the heart of Georgia's state. It has appalled Georgian voters, embarrassed the authorities, and led to a surge of support for Georgia's opposition and for Ivanishvili, whose $6.4bn (£4bn) fortune is put at half of Georgia's GDP. He burst on to the political scene a year ago, following years of quiet philanthropy in which he had paid for police uniforms, restored crumbling churches and funded salaries for actors and struggling artists – a sort of Georgian fairy godfather.

His Georgian Dream coalition, named after a song by his rapper son, lags behind Saakashvili's ruling party in the ratings. But it is catching up, according to the latest polls. On Saturday evening, 100,000 Georgian Dream supporters packed into Tbilisi's central Rustaveli Avenue. "It is as clear as day – we will win and achieve another victory in the history of our nation," Ivanishvili told them. "We will not let anyone separate us from civilisation, modern times and democracy."

His rise has spooked the government. It has variously dismissed him as a Kremlin stooge, a political dilettante, a "weirdo", and an old-style paternalist. Government aides mock his zoo, kept at his village home in western Georgia. They also say his sprawling coalition includes unsavoury elements, such as xenophobes and fans of Stalin, who was born in the Georgian town of Gori. But, undoubtedly, Ivanishvili has plugged into a mood of popular discontent and fatigue with Saakashvili, who critics say has become increasingly dictatorial.

Ivanishvili dismisses the government's many charges against him and says that it is Saakashvili who is the monster: "I'm very happy that I'm physically here and alive. You don't know Saakashvili's true face. He's capable of doing some atrocious things."

Thousands of observers have flooded into Georgia for the election. Lobbyists hired by Ivanishvili have bombarded members of the US Congress and other opinion-makers with emails promoting Georgian Dream and accusing Saakashvili of treachery. The Georgian government has hit back: all international visitors to Georgia, a land of ancient viniculture, receive a free bottle of Saperavi wine from passport control. The government also says that Ivanishvili is using his money, made in the 1990s, to buy the election.

In a report on Saturday, Transparency International, which describes itself as an anti-corruption organisation, blamed both sides for presenting "simplistic programmes" for increased social spending. For many voters, it is poverty and unemployment that have driven them to support Georgia's opposition.

Sitting in a Tbilisi park on a warm evening, next to a statue of Giorgi Leonidze, a Georgian poet, Manana Nizharadze said she was surviving on a state pension of just 100 lari (£37) a month. "We live very badly. Wages are low. Communal charges are high. We can't afford medicines," she said. "Saakashvili is a bad person."

Edward Saakashvili, a distant relative of the president, demurred. "He's done good things. People don't like discipline," he said, tossing back a glass of schnapps.

Many voters complain of the president's disastrous 2008 war with Russia. Both South Ossetia and Abkhazia – which broke away in the 1990s – are now home to a massive Russian military presence. Russia's president, Vladimir Putin, who famously described how he wanted to "hang Saakashvili by the balls", conducted military exercises there last week, a crude reminder to Tbilisi that Moscow could reinvade any time.

"Shevadnadze lost the whole of Abkahzia. Misha [Saakashvili] lost Ossetia. It was a big mistake," said Nizharadze.

Saakashvili's own future is unclear. He is 44 and due to step down as president in January 2013. His government has enacted constitutional changes that will transform Georgia next year from a presidential to a parliamentary republic. This has fuelled speculation that Saakashvili is planning to "do a Putin", and perform a job swap that would see him hang on to executive power by becoming prime minister.

His government colleagues, however, are sceptical of such a manoeuvre. "Politically it's impossible," said Giga Bokeria, secretary of Georgia's national security council.

• This article was amended on 3 October 2012 to correct the population of Georgia from 4.7 million to 4.5 million.